Why did you purchase life insurance? If you’re like most people who buy life insurance, you’re looking to provide a source of income for someone, such as a spouse, parent, or child, after you pass. Buying the policy was the first step. Now you’ll need to do a little more work to help ensure the money you leave behind lasts.

Is travel a part of your retirement plan?

You can never leave too much. Or can you?

First, make sure what you’ll leave behind is enough. Review your insurance needs annually, or more often if necessary. After a major life event (e.g., birth, death, marriage, divorce, job loss), it is also a good idea to review your coverage. If you think you may need more life insurance or that you may have too much, talk to your insurance professional. They can help advise you on the right amount of insurance for your unique situation—remember, you’re planning for your family’s future.

Also, if you’ve chosen a cash value life insurance policy that allows you to make investment decisions, you may want some advice from an accountant, an investment advisor, or a financial professional. These experts can show you how to allocate your cash value account so it fits in with your overall financial plan.

Can we talk?

If you’ve bought life insurance to ensure a bright future for your children, sit them down and talk about it. It’s always a good idea to talk to your children about the value of money, but serious talks about life insurance proceeds and the family estate should wait until they’re older. Eighteen is probably a good age, or slightly younger if you think your youngsters are mature enough to handle it. Although you don’t want to dwell on the fact that Mom and Dad won’t always be around, you do want to make them understand the following:

  • How much money they’ll receive at your death, or at least that there will be sufficient funds for them to carry on, go to college, and so on
  • Who will be in charge of the funds
  • When it will be accessible to them and for what purposes
  • What restrictions will be in place
  • Why all this planning is necessary

Do you have specific desires as to how you want the money to be spent (e.g., college education)? Explain your reasons. You may find that your children want to respect your wishes instead of trying to find ways around them. If you have young children, you’ll need to appoint a guardian(s) in your will to care for them and manage their assets (including insurance proceeds), in case something should happen to you and/or your spouse. Small children won’t understand all the financial lingo, and you don’t want to frighten them with talk of death. So, talk to the person(s) you have chosen as guardian(s) about your plans and wishes.

Did you name your spouse, a parent, or someone else as a beneficiary? Talk to them now–don’t wait until a crisis arises. Among other things, you’ll want to discuss how the insurance proceeds might be invested and what they should be used for (e.g., home mortgage, children’s education, your final expenses). You should also talk about any financial plans you’ve already made (or plan to make). You should explain what life insurance policies you have and where all the important paperwork is located. This will help ensure your beneficiaries are prepared when the time comes, rather than feeling overwhelmed.

Revocable and irrevocable trusts

If you’re concerned about your beneficiaries’ spending habits, or that they might need help managing their inheritance, a trust may be the appropriate tool for you. A trust is a legal agreement in which you appoint a person or institution, called the trustee, to manage certain property (e.g., real estate, stock portfolios, life insurance proceeds) for the benefit of one or more beneficiaries. Your attorney can help you set one up. If the right type of trust is used, this can be an excellent way to plan for your beneficiary’s financial future. A corporate trustee, such as Arvest Bank, can be a great option in this situation. The team of trust and estate professionals can offer investment advice that best meets the requirements of the trust, the laws governing trust investments, and the needs of beneficiaries. You can even make an appointment with an Arvest Trust Officer to visit about your unique situation.

Two basic types of trusts are used in conjunction with life insurance: revocable trusts and irrevocable life insurance trusts (ILITs). Revocable trusts come in many varieties and can be used for many purposes. Revocable trusts allow you to retain control over the trust and its assets, and even to terminate the trust if you so choose. You would generally name yourself as the trustee of a revocable trust while you’re alive and appoint someone else as a successor trustee to carry out your wishes after you pass. The trustee is legally obligated to pay out the proceeds of the insurance policy, and any other assets in the trust, as specified in the trust agreement. The benefit to you is knowing your wishes will be carried out. Your beneficiaries won’t be able to get around the trust agreement. The downside for you is your estate will have to include assets in a revocable trust when calculating estate taxes.

With an ILIT, you’ll enjoy certain tax benefits–the insurance proceeds and other assets in the trust aren’t considered part of your taxable estate. You don’t want your estate to pay unnecessary taxes, because this decreases the amount your heirs will ultimately receive. However, you must give up all rights and control over the trust–you can’t act as the trustee or make any decisions about how assets are invested. If it appears you have influence over the trustee, or that the trustee is carrying out your wishes, the ILIT will be added back into your estate tax calculation. If you have a sizable estate, you may be able to minimize the potential tax burden with an ILIT.

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Arvest Wealth Management does not offer tax or legal advice – consult a professional.